Silly Silver Manipulators

NEW YORK (TheStreet) -- It is now clear that the precious metals market was "set up" this week by the bankers for a major take-down (a "take-down" which is already starting to fizzle-out).

It began with the piece by World Bank president

Robert Zoellick, "suggesting" a return to some sort of gold standard. Having a banker come out with that remark was designed to whip the bulls into a manic frenzy -- and it worked. Not only bullion prices, but the share prices of mining stocks began to shoot up in the rapid, erratic manner indicative of manic buying.

To "help" the process along, it's clear that mining shorts were actually pushing the share prices of gold and silver miners higher especially as the market opened Tuesday morning. Once they had longs extended (over-extended?) to the maximum degree, the "ambush" was launched: "margin" was reduced on silver trading accounts by about 30%, with absolutely no warning. Or rather, I should say there was no warning to the general public.

Apparently the bullion banks were tipped off, since despite their plans to ambush "longs," the bullion banks were covering their own short positions (and taking heavy losses on rising prices) to reduce their own margin in anticipation of this announcement. As a result, only the longs were forced to cover margin calls after this "surprise" announcement. Then, with the bankers pushing down on the silver price with all their might, they leveraged all of the long margin-players out of the silver market -- inducing the expected large drop in price.

No doubt the bankers are busy patting themselves on the back for the "success" of their latest operation. However, to me, all that comes to mind is the image of Wile E. Coyote. Those who can still recall their cartoon-watching years will be familiar with how the attempts of poor, hapless Wile E. to trap the Roadrunner always ended up (literally) blowing up in his face. And so it is with the bullion bankers.

Understand one of the economic principles: any good which is under-priced will be over-consumed, and the greater the under-pricing, the greater the over-consumption. It is in this respect that, just like Wile E. Coyote, the bullion banks are directly responsible for their own demise.

Ironically, the height of their idiocy came

decades ago, when their dominance of the precious metals markets was absolute. Instead of simply moderating price suppression (and thus stimulating only moderate over-consumption) the bankers pushed the gold and silver markets to the lowest prices possible -- which maximized demand.

To make the long-term picture even worse for the bullion banks, they had pushed the price of gold so low that 90% of the world's gold mines could no longer break-even, and had to shut down. Thus, not only had the bankers greatly stimulated demand, but they also served to greatly restrict supply. In the case of silver, the price was pushed so low that there were few "primary" silver mines left operating on the entire planet. Most silver production came as a "byproduct" of other mining, something which is still true to this day.

In other words, the bankers' extreme price manipulation artificially built in huge supply deficits into both the gold and silver markets. Why is this so important (and detrimental) to the bullion banks?

Despite the natural inclination of these bankers to sell people paper, and call it "silver" or "gold," as with any scam of this nature, the con-men (i.e. the bullion bankers) need some real metal to "seed" the market for all their paper-bullion scams. Indeed, most precious metals investors are now very familiar with the disclosure of

Jeffrey Christian of the CPM Group, made during the CFTC hearings this spring. Christian told us that the ratio of "paper gold" to actual bullion was somewhere in the vicinity of 100:1.

There are two obvious observations to make in looking at that extreme ratio. First of all, that ratio has only soared to such a bubble extreme (on the "short" side of the market) in recent years. In past decades, the bankers still had so much real metal to dump onto the market to suppress prices that there was no need to engage in such reckless, paper leverage. The other observation to make is that no matter how high that leverage increases, the bankers still need significant quantities of bullion (even with their leverage) to exert any control at all over the gold and silver markets.

The self-destruction of the bankers is more obvious when we focus upon silver. Unlike gold, silver had been pushed to such a cheap price that vast quantities of silver were being used in an almost countless number of new industrial applications. Indeed, new patents for silver-based technology have exceeded the patents for any other metal for many years.

Thus, in grossly under-pricing silver, the bullion banks are directly responsible for the explosion in industrial silver demand. In restricting supply, while radically stimulating demand, the bankers were enormously "successful." In just a 15-year span, global silver inventories

plummeted by 90%.

The other reason that this massive industrial demand is such an important factor with respect to silver manipulation is that unlike "bullion investors," with industrial silver users there aren't any chumps willing to buy into the bankers' paper-bullion scams (i.e. the so-called "bullion-ETFs" and their "unallocated" bullion accounts), since industrial users can't use banker-paper in lieu of real silver.

If the bankers had elected to engage in only moderate price suppression of silver, here is how the evolution of this market would have differed. First of all, it would have required only a tiny portion of all the real bullion which the bankers dumped onto the market to hold down prices. Put another way, for each additional percentage point that prices were pushed lower, it took exponentially increasing amounts of bullion to achieve that additional price suppression.

In addition, if prices were only moderately suppressed there would have been vastly greater mine supply each year and much lower demand. Put all these factors together, and it would have been relatively simple to engage in moderate manipulation at a level which did not result in any supply deficit for either silver or gold. In other words, their suppression scheme could have been perpetrated permanently, without the bankers ever running out of bullion, and thus with no need to leverage their bullion by 100:1, just to maintain a little residual control over this market (as is the situation today).

This obviously begs the question: Why didn't the bankers moderate their manipulation of these markets? First of all, there were more short-term profits available if they were willing to recklessly squander their bullion, and we all know how these greedy bankers can be counted upon to chase short-term profits. It was also simply more evil to brutalize these markets (and market longs) to the maximum extent possible. Lastly, bankers have no understanding of basic economics.

We know that last point to be true, since to this very day, they continue to engage in behavior which must

accelerate the date these markets implode (due to exhausting inventories), at which point prices will shoot many multiples higher and banker-losses on their short-positions will increase exponentially.

By 2005, when even the dim-witted bullion bankers must have noticed that 90% of their bullion was gone, the rational thing for these manipulators to do would have been to push the price of silver sharply higher. Had bankers encouraged the move of silver to a price above the $20/ounce level back then, instead of delaying that price-advance with all of their might, they could have moved the silver market back into a real surplus.

However, rather than seeking to increase inventories (and thus the life-span of their silver manipulation), the bankers simply increased their lying and cheating. On the one hand, with the aid of the quasi-official record-keepers for the gold and silver markets (GFMS and the CPM Group), they have engaged in

ridiculous shams to try to pretend that silver inventories are much greater than they are -- and have even created a phony "silver surplus" with their manipulated inventory numbers.

This inventory fraud hides the fact that global silver inventories are getting closer and closer to complete exhaustion. Thus instead of industrial users looking to substitute other inputs for silver (where possible) and scaling back new applications, the bankers' phony inventory numbers only encourage industrial users to increase their silver-based applications.

On the other hand, they have had to massively increase their bullion scams (such as "SLV"), since with far less real silver around, and massive pent-up demand, the only way to delay implosion of the silver market is to push their paper-silver onto as many chumps as possible.

In short, if there was some "mole" within this banking cabal thirty years ago, who knew the intentions of the bankers and wanted to sabotage the bankers' scheme, the mole would have chosen the exact same strategy which the bankers chose for themselves.

Much like Wile E. Coyote's obsession with doing harm to the Roadrunner only resulted in infinite pain and suffering for himself, so too are the bullion bankers ultimately causing the largest "injuries" to themselves. And while they are writing their own epitaphs, they are allowing savvy precious metals investors to buy cheap silver -- one, last time.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.